Meiji Magic

All developed markets are currently preoccupied with identifying the losers of AI. All of them? Not quite: one market is resisting the wave of doubt: Japan. Japanese equities, driven by the Topix, have risen by nearly 14% in yen terms since the start of the year[1] , while the US S&P 500 is trading slightly down and the STOXX Europe 600 is capped at 5%. Over a rolling year, the divergence is even more pronounced, with the Topix jumping 48% (44% in dollars) compared with 13-15% for the S&P 500 and Europe.

Paradoxically, this renewed strength in a market traditionally synonymous with underperformance can be linked to the upward trend in interest rates since 2022. Enabled by the return of structural inflation, it has benefited sectors that have long been penalised by low interest rates, foremost among which are banks (+500% in five years!), allowing them to regain strong profitability. The Japanese 10-year yield has thus risen from 0.2% to 2.2% in five years, without the “real” rate increasing substantially, thanks to the inflation accompanying this movement.

But an even more powerful factor has been at work: the Takaichi effect. Prime Minister since October 2025, she won the early parliamentary elections she herself had called on 8 February by a landslide. Her Liberal Democratic Party now holds two-thirds of the votes, an unprecedented result in the country’s democratic history. This gives her considerable leeway to launch an ambitious programme which, while not yet on the scale of the Meiji revolution launched in 1868, is the beginning of an economic explosion.

At the top of this programme is “economic security”, her signature concept, according to which the economy serves above all national sovereignty. Embracing strong nationalism coupled with interventionism tempered by liberalism, which is essential to retain its ally, the Innovation Party, this plan involves colossal projects: securing critical supply chains, achieving excellence in 17 cutting-edge sectors such as semiconductors, AI and quantum technology, and protecting vital infrastructure in energy and telecommunications. This strategy is accompanied by strengthened diplomacy with Washington, New Delhi and Brussels to counter Chinese ambitions, including strong support for Taiwan.

How can such ambitions be financed? An initial tranche of new public spending was approved at the end of 2025 for more than €100 billion, or around 3% of GDP. Although the market initially doubted the sustainability of this effort, causing a mini panic on interest rates and a depreciation of the yen, the Prime Minister’s reaffirmed commitment to “responsible” financial management restored calm. Thirty-year rates, which rose to 3.9% in January 2022 in a panic reminiscent of the “Liz Truss moment”, fell back to 3.4%, while the yen recovered against the dollar.

Japan is thus sending a message that over-indebted countries would do well to ponder: public debt is only a calamity when it is not controlled. While Japan’s gross debt stands at 230% of GDP, it has been falling since its peak of 260% in 2020 thanks to inflation and a contained deficit. Ninety per cent of it is held by stable domestic players and is offset by considerable public financial assets, bringing net debt down to around 130% of GDP – a level comparable to that of Italy or soon France, where net debt is unfortunately almost equal to gross debt.

These measures have yet to prove their long-term effectiveness. But they have already revived stock market momentum and public confidence in a country that was feared to be on the brink of collapse. This is a sign that even in old nations that appear to be in decline, new eras are still possible, without magic, as long as an ambitious programme is validated by the population as well as the markets. Meiji did it, so why not Takaichi today, and others tomorrow?

Alexis Bienvenu, Fund Manager, La Financière de l’Échiquier (LFDE)

Written on 13 February 2026

Disclaimers: These data and opinions, as well as the sectors mentioned, are provided for information purposes only and therefore do not constitute an offer to buy or sell a security, investment advice or financial analysis. Past performance is not indicative of future results.

[1] As of 12 February 2026, Bloomberg